Greenscam: The View From Europe

This week we review what I learned on my trip to Geneva; we look at a way
to invest in the Chinese Renminbi; I offer some thoughts on master strategist
Paul McCulley latest essay; I ponder the implications of Bill Bonner's soon
to be released best-seller; and, I get more concerned (and vocal) about Greenspan
and Fed policy. It should make for a thought-provoking and interesting letter.

Last Tuesday evening I spent one of the more stimulating (and enjoyable) evenings
I have had in a long time in the home of one Francis Stobart of SODITIC in
Geneva. He had assembled a small, but eclectic, group of Swiss private bankers
and asset managers for dinner to discuss whatever small insights into finance
and economics I might be able to dispense. I was expected to sing for my exceptional
supper and superb wines, but I believe I walked away with far more insight
than I was able to impart.

While the size of the firms represented ranged from huge to small and the
range of services was quite diverse, we all had one common connection: our
clients expect us to come up with investment strategies that make sense in
today's world. The problem is the future seems particularly risky as of late,
with the world of investment ideas a less and less friendly place. Where does
one safely put assets, whether it is billions for institutions or smaller personal
accounts for retirees? One very large and rather bearish manager is now suggesting
his rather substantial clients allocate 15% to physical gold. While not all
participants were quite so bearish, the outlook was more somber than I would
have expected.

Reading an advance copy of Bill Bonner's new book, Financial Day of Reckoning
(on my computer - it will soon be out in print) on the ten hour return flight
did not relieve that note of concern. But it did give me some food for thought
as I reflected upon the conversation. A few of those thoughts gleaned from
that evening might be of interest:

Greenscam

As might be expected, there were more than a few questions for a Republican
from Texas. Not only at this dinner but throughout the week, I was posed some
hard, but polite, questions. The night before, I had dined in Paris with a
friend of Chirac's, who also had questions. Jean-Michelle noted that it was
not the strategy in Iraq that was the concern, but the execution.

I have been a staunch defender, and still am, of the President. But I will
tell you that it is disconcerting to talk with sophisticated men of considerable
experience in the world who so clearly did not understand the President's view
or America's concerns. It was not a case of these men not listening (I did
not have an opportunity to discuss events with any ladies). It was not always
a case of disagreement. We have clearly not communicated well to the public
at large, and that must be corrected or it will come back to haunt us.

But the subject of the evening was primarily economics, so that is where we
will return. There was almost universal unease with the US economy. There was
a recognition that the US was the economic engine for the world, and a concern
the engine was running out of steam. There was an intense discussion on Greenspan's
latest policy statements, which none (including me, of course) in the room
could understand. It is best summed up in a statement by Alex Bridport, of
Bridport and Cie., in a client letter he wrote the next morning. (Bridport
is a major firm, consulting with large European institutions on their bond
portfolios, which in the aggregate would be well in excess of $100,000,000,000.
They have bought over $20,000,000,000 in bonds for their clients just since
the beginning of the year. In short, they have their fingers on the pulse of
European institutional investors.) This caustic note from Sir Alex:

"When it comes to wealth destruction, the recent fall in bond values must
rival any thing that happened to the stock market when the bubble burst. For
this contribution to mankind, investors can thank Alan Greenspan for an operation
we might call the "Greenscam." It involved him allowing investors to believe
that the overwhelming risk was deflation and that all means would be used,
including the Fed buying long T-bonds, to keep long-term yields low and support
the "carry trade." Then Greenspan pulled the rug and investors all fell down,
taking off the carry trade.

"We admit to being as much a victim of the Greenscam as anyone else. At least
we all know whom never to trust again. Beyond the half-truths, the inherent
contradictions and unproven optimism about the rolling "recovery in six months," our
task is to weigh up the likely developments in the US economy as the starting
point to what will happen there and elsewhere. Until last week we had "swallowed" the
Greenscam line that the economy could only recover or deflate. Since recovery
with such a debt load looked impossible, we went along with deflation being
the more likely scenario, although, in fairness to ourselves, we saw it as
only a short-term phenomenon, as a weakening dollar would offset deflationary
pressures in time (we overestimated the amount of time in making a "wild guess" of
one year).

"As of last week, because of a little publicized report that producer prices
were rising at a 4.8% annual rate, we began to think of the third possibility:
stagflation. Given our view that recovery is impossible until the US imbalances
have been corrected (a view we hold despite volatile stock market rallies),
we see the debate as deflation vs. stagflation. The latter is understood to
mean slow growth (only slightly above growth in working population), increasing
unemployment, and rising inflation and interest rates.

"A major question for the outlook in this stagflation vs. deflation competition
is the future of the dollar. Bridgewater points out that, in past periods of
high twin deficits, the dollar fell but bonds did not. They see the Fed producing "whatever
liquidity is needed to shift some of the downward pressure on bond and stock
markets to the US dollar" - hoping to attract foreign capital because the dollar
is cheap (presumably with a view to its appreciating again). Up to that point
we agree with Bridgewater's analysis, but we have to part company with them
when they continue to see the deflation model and falling yields as the most
likely scenario.

"Our view is towards the stagflation model, because of the force of argument
from the indices and because the dollar looks likely to fall again. Despite
our now leaning towards the stagflation model (yes, we changed our minds over
the last few weeks - but the facts changed, too!), it would be inappropriate
to recommend maturities other than those close to the bond index. Yields overshot
on the way down and may well do on the way up. Besides the Greenscam may not
have run its course. New cash should wait on the sidelines or be used to buy
instruments to counter a further rise in yields and inflation."

I am attracted to this view, as it is similar to mine, although I think the
time-line is somewhat longer and more stretched out. Reviewing quickly, I think
we are in a slow growth Muddle Through Economy. The Fed has virtually guaranteed
that short-term rates will remain low for some time, until either inflation
appears or the economy is soundly growing above trend. Neither, as I explain
below, is my most likely scenario. At some point, there will come a recession
(there is always another recession), without the Fed having the "ammunition" of
being able to lower short term rates. In my opinion, if a significant rise
in rates, either long term or short term, were to happen in the current slow
growth economy, it would indeed trigger a recession.

Since recessions are by nature deflationary, the Fed will respond with the
rest of its arsenal, as they view deflation as the worst of all possible worlds.
I believe they will indeed stop deflation dead in its tracks. However, I think
that leads not to a comfortable reflation and a return to the Roaring 90's,
but to a slow growth inflationary period, similar to the stagflation of the
70's. It will become the Muddle Through Decade.

I use the term Muddle Through to suggest that we are not facing an End of
The World As We Know It scenario. For a variety of reasons, I do not think
we will see a return of the Great (or even a Lesser) Depression, as do some.
However, there are significant imbalances that must be addressed, and until
they are, there will not be a return to continued above trend growth. That
means the investment opportunities will be different than those of the 80's
and 90's.

The Easy Prediction?

And this is where we will momentarily digress and look at Paul McCulley's
latest essay. He is the managing director of Pimco, the world's largest bond
management company. McCulley makes me think as few other writers do, offering
insights and analysis in a flowing writing style. When I disagree with him,
as I sometimes do, I am forced to think through the reasons why. Sometimes
I change my views, as the facts change, and sometimes I can become ore confident
of my own. In either case, it is a valuable exercise. (My real "complaint" with
McCulley is that he only writes once a month and I would like to read more
of his thought.)

"I believe the Treasury market is in a "rational" bubble, because the intermediate
term global economic outlook is a bi-modal one, rather than a "normal" bell
curve. Put more bluntly, Keynesian reflationary policies will work and inflation
will go up, or they won't work and deflation will unfold. A perpetual muddle-along
scenario, the easiest one in the world to predict, is also, I think, the least
likely."

(By this, I assume he means suggesting that the current status quo will continue "perpetually" is
unlikely. I would agree that "perpetual" is most unlikely. It is difficult
to imagine a scenario of low inflation, slow growth lasting for too long a
period of time. I will outline the reasons why below. But in the short-run
of the next few months and quarters, it seems to me the more likely case.)

So who is right? Bridport or McCulley? Both are sitting on monstrous piles
of bonds. Both are extremely smart and have the best and brightest working
with them. Let me weigh in, offering a few thoughts on the matter.

As I look around the room at my fellow "predictors," I notice a large gathering
at the end of the room labeled "strong recovery." They suggest a powerhouse
recovery, as predicted by the Fed for next year (between 3.75% to 4.75%). Fed
Governor McTeer suggests that such growth will not even be inflationary. Fed
Governor Bernanke's speech this week suggests the same. Powerful growth and
no inflation pressures? Ah, for such nirvana to actually arrive. I will be
surprised, but delighted.

Or consider the very robust numbers like those from the Blue Chip Economic
Survey. They estimated that the gross domestic product gains for the third
and fourth quarters would be 3.6% and 3.8%, respectively. (ABC News)

Over on the other end of the room is a smaller crowd of Austrian economists
and other assorted bearish predictors, who look at the huge imbalances in trade,
debt and government deficits, not to mention large (they think excessive) money
growth, and see a very unpleasant ending.

There are not many "stuck in the muddle" of the room with me, though my company
is swelling somewhat from the real loneliness of last year. Those who actually
have to eat their own cooking are not as optimistic as the Fed. Today we read
on Moneyscope: "U.S. businesses are less sanguine. The National Association
for Business Economics spoke with 123 corporate planners and financial analysts
and came up with a dimmer outlook. According to the NABE survey, the forecasts
were 3-to-1 for growth below 3 percent for the remainder of the year."

McCulley make the case for either deflation or a successful reflation. Bridport
(as I have) suggests a third alternative: stagflation.

Let's take the case for the deflation scenario. As noted above, this week
Fed Governor Ben Bernanke once again weighed into the topic, telling us the
deflation threat is real even if the economy enters into a period of robust
growth. (For the economically inquisitive, you can read the speech at http://www.federalreserve.gov/boarddocs/speeches/2003/20030723/default.htm)

First, he tells us:

"This distinction between inflation that is positive yet too low and deflation
is worth exploring for a moment. Although the Federal Reserve does not have
an explicit numerical target range for measured inflation, FOMC behavior and
rhetoric have suggested to many observers that the Committee does have an implicit
preferred range for inflation. Most relevant here, the bottom of that preferred
range clearly seems to be a value greater than zero measured inflation, at
least 1 percent per year or so."

He notes that Core CPI was only 1.5% for the year ending June 2003 and trending
down in a year over year basis. "Core personal consumption expenditure (PCE)
price index, a so-called chain-weight index that has the advantage of allowing
for shifting expenditure weights, also fell ...to 1.2 percent." Thus, we are
in "shouting distance" of the lower end of the preferred range.

What can happen from here? "..the factor most likely to exert downward pressure
on the future course of inflation in the United States is the degree of economic
slack that is currently prevailing and will likely continue for some time
yet. Although (according to the National Bureau of Economic Research) the U.S.
economy is technically in a recovery, job losses have remained significant
this year, and capacity utilization in the industrial sector (the only sector
for which estimates are available) is still low, suggesting that resource utilization
for the economy as a whole is well below normal. By conventional analyses,
therefore, even if the pace of real activity picks up considerably this year
and next, persistent slack might result in continuing disinflation."

But what if "the pace of real activity" does not pick up considerably? What
if the "output gap" or economic slack to which he alludes to does not close?
It would seem to follow from Bernanke's thought (and I agree) that deflation
becomes an issue. This could come about as the economy continues to slowly
shed jobs, raising the level of unemployment, with the accompanying effects
of falling consumer confidence and spending. A recession would follow at some
point. This might take a long time (up to several years), but without sustained
above trend growth, it seems a very possible scenario.

What if instead of a slower pace of growth we have an actual recession? This
scenario is real enough in the short term if long term interest rates continue
their recent steep rise. (I addressed the concern last week: a substantial
rise in mortgage rates, beyond the current levels. Thus mortgage refinancing
slows, thus consumer spending on the margin is affected. This also means new
housing construction slows as rates rise, and thus the two areas of the economy
which are keeping things afloat suffer. The more rates rise, the greater the
problem.)

Thus deflation could result from slow growth or a rapid rise in rates. One
is faster than the other, but either still gives us deflation.

As McCulley forcefully and logically points out, Greenspan is not likely to
raise rates for quite some time, and perhaps not again in his career. (I really
do urge readers to read this month's McCulley essay, if only for this point.)
As I wrote above, the Fed will act decisively, although as Professor Robert
Shiller wrote several weeks ago in the Wall Street Journal, the fear is they
will act to late. In either case, whether they are reactive or proactive, they
should be able to reinflate the economy. But if we are in a recession, it will
not be easy. The Fed will have to use "unconventional means." They will re-ignite
inflation.

The point for this phase of the argument is not how much inflation they re-ignite,
but to suggest that deflation of more than a short term nature should not be
in the future, barring an unforeseen "shock" or serious Fed incompetence.

But Where's the Growth?

But what of the happier scenario: a successful reflation and a solid, growing
above trend economy? Let us make no mistake, a Fed forecast 4.75% annual growth
rate for several years, even given Bernanke's "output gap," will ease deflation
worries, re-ignite employment and set the stage for a healthy rise in interest
rates. 4.75% growth will cure a lot of ills and ease a lot of imbalance.

Try as I might, I cannot see such idyllic circumstances in the cards. Where
will the growth come from? A large boost in business spending does not seem
to be in the cards given the NABE survey of real businesses. As an example,
GM reports that 90% of its last quarter profits were from financing activities,
and half of that from mortgages. Morgan Stanley predicts GM loses money on
its actual car manufacturing in the third quarter. Neither does the ISM survey
of manufacturers support the case for a large growth in business spending.

Can consumer spending grow at 4.75%? "In the late 1970s the rate of consumption
in the U.S. economy as a percentage of GDP was 62%. By the end of the 1980s,
that number rose by 4% to 66%; and it rose another 4% by the end of the 1990s.
But by the end of 2001, consumption as a share of current GDP growth exceeded
90%." (Financial Day of Reckoning by Bill Bonner, due out in October - see
more below).

If what little growth there is comes from consumer spending, who are already
70% of the economy, how much more of the heavy lifting of growth can they do?
Especially given that a large part of that growth comes from debt and mortgage
refinancing? If rates are backing up, is it likely that this growth will continue?
If lowering rates have been a stimulus, will not rising rates be a drag?

Can the third leg of the economy, housing, be expected to grow from record
highs? Admittedly, the recent weeks have set records, but it is highly plausible
this was the result of homebuyers pushing their purchase up in time in fear
that rates have seen permanent lows and will not come back down. Let's wait
and look at what sales will be over the next few months as rates climb back
over 6%.

Is a lower dollar going to boost the economy? It will help, but a weakened
world economy does not seem ready to buy American with the same vigor with
which we buy foreign goods.

Louis Rukeyser suggests that the bond market is confirming what the stock
market is saying. They both suggest that a recovery is imminent. The question
is: how reliable are such market prophecies? The stock market has given us
four separate "predictions" in the past few years only to watch them fail.
The bond market could be said to be simply returning to the level prior to
the Fed's (evidently) misunderstood "promise" to lower long term rates which
Greenspan took off the table.

In short, I fail to see from what quarter the impetus for robust growth comes.

But Where is the Recession?

All that being said, the current data does not suggest a recession. Consumer
spending is holding up and even rising slightly. Business spending is positive.
Capacity utilization is not falling. Productivity is rising. There was a nice
rise in durable goods spending today. Absent an increased rise in mortgage
rates, this does not appear to be an economy ready to roll over.

The final scenario of stagflation? I posed the following question to my dinner
companions: What is the largest US export? My answer was that it is the US
dollar. We are currently exporting 5% of our GDP each year. While it would
take too long to go into the total argument, suffice it to say this cannot
continue for too long.

The world at some point simply starts to want something besides dollar denominated
debt. It will not be too many years at the current rate until foreign central
banks would hold all US government debt. It is simply not credible to believe
such a situation will occur. Long before that time comes, foreign governments
will begin to look for other ways to hold their reserves. The market will simply
force them to do so. Too much of a good thing is still too much.

"What investments do you think have potential in the current environment?" they
asked as the evening drew to a close. One of my answers was the Chinese renminbi
versus the dollar. Given that the room was almost entirely bearish on the dollar,
there were nods all around. "How do you do that trade?" they shot back.

I noted that a US bank offered cash equivalent renminbi accounts. How do they
do such a thing? Forward swaps on a rolling basis was the answer.

The bank is our old friend Everbank. You can indeed open an account which
will be denominated in renminbi. (fyi, renminbi is the official name of the
currency. The name the Chinese people call it is the yuan.) The account pays
0.5% annually, but costs you that much to exchange the currency both in and
out. When the Chinese government allows the renminbi to revalue, if it goes
up against the dollar, you will benefit from that increase. While many observers
think it will revalue about 30% over time, the question is how much time is "over
time"? Is it 6 weeks or 6 months or 6 years?

The Chinese government shows no indication that it will respond to foreign
pressure to allow the currency to rise. They like the competitive edge it gives
them as they try to find jobs for their under-employed nation. Then only reason
they will do so is the market may force them to allow the currency to slowly
rise or they risk over-heating their economy, as articles in both the Financial
Times and Business Week point out this week. Since the Chinese government forces
their nation's businesses to sell any dollars they receive to the government,
the businesses are finding a home for their Chinese currency in real estate,
which is rising rapidly in value. To prevent a bubble, the government may be
forced to slowly float or widen the bands (the upper and lower limits) under
which the currency is allowed to trade. Every time the government widens the
bands, I expect the currency will immediately trade to the upper limit of the
band.

You can find out more about these accounts by calling Chuck Butler at Everbank
at 800-926-4922. In the interest of full disclosure, let me note that my publisher
(and through them therefore me) has a sponsorship agreement with Everbank.

When the Chinese begin to find they have too many dollars, the end of what
Bonner calls the Dollar Standard Era will be nigh. The dollar will correct.
Rates will likely be forced back up. Rising interest rates, rising inflation
and slow growth will give us a period that will not be a repeat, but it will
be a rhyme, of the 70's and stagflation.

The Fed Must Become Transparent

Let me offer one final thought on a point that hedge fund manager Phillipe
Peress of Big Star Capital made at our dinner. He noted that the Swiss central
bank made it quite clear last year that the Swiss franc should no longer be
considered a "safe haven" currency. Too much money was flowing into the country,
causing relative prices to rise. (Indeed, I bought my first $6 Diet Coke [a
mere ten ounces] this week. A meal at McDonalds for a family of four costs
$30. Switzerland is a wonderful country, but the cost of living is high.) To
back up their words, they have drastically cut rates and let it be known they
intend to monitor the franc-euro levels. They were quite clear about what they
intended to do and then did what they said.

This is in contrast to the recent Fed actions. Paul McCulley noted:

"If there was ever any question about this dynamic dance between the Fed
and opportunistic buyers/sellers of duration, market action since last
November, when the Fed launched a rhetorical anti-deflation campaign, should
end it. Regrettably, Fed Chairman Greenspan started the campaign on November
13 by declaring that the Fed could/might buy longer-duration Treasuries outright:

"There is an implication in the notion (of fighting deflation risks) that
we are restricted solely to overnight funds. But our history as an institution
indicates that there have been innumerable occasions when we have moved out
from short-term assets and invested in long-term Treasuries. We do have the
capability, if required to do so, to go well beyond activities related to
short-term rates."

"I say that it was "regrettable" that Mr. Greenspan started the anti-deflation
campaign this way, because he needlessly changed the nature of how Treasury
markets participants must handicap prospective Fed policy. Outright buying
of long-term Treasuries was and is a "last resort" for the Fed, and a step
that is highly unlikely to ever be taken. The Fed would/will do so if, and
only if, market participants fail to appreciate and discount what the Fed
was planning to do, and is planning to do: hold the Fed funds rate super low
for a long, long time."

The market clearly thought the Fed was planning to move actively on long term
rates. They perceived this from Fed speeches and statements. The Fed also clearly
understood this was the perception, as more than one commentator, in scores
of circles (myself included) noted the apparent change in policy direction.
The market, without any real Fed action, drove rates down, thinking they had
a green light from the Fed.

Then Greenspan simply discounted the notion in his congressional testimony,
and rates have moved violently back up. Recent bond investors have lost money.
As Bridport noted, many feel they have been subjected to a Greenscam. Once
bitten, twice shy?

It is harder to redeem a reputation than build one. This is why I have been
so adamant about transparency at the Fed. Bond investors hate uncertainty.
They cannot plan in such an environment, and that is what we have today. Bernanke's
speech was made to help quiet such worries.

The last three paragraphs of his speech are the most important (emphasis in
bold is mine):

"What I have in mind here is not a formal inflation target but rather a tool
for aiding communication. The main purpose of this quantification of price
stability would be to provide some guidance to the public and to financial
markets as they try to forecast FOMC behavior. In a situation like the current
one, with inflation presumably near the bottom of the acceptable range and
trending down, and with considerable slack remaining in the real economy, the
Fed could make use of this quantitative guidepost to signal its expectation
that rates will be kept low for a protracted period, and indeed that they would
be reduced further if disinflation were not contained. If private-sector forecasts
also called for disinflation, confirming the downward risk to price stability,
then medium-term bond yields should accordingly be low, supporting the Fed's
reflationary efforts.

"In principle, one could communicate a similar message, though perhaps less
precisely, without a quantitative measure of price stability. What is missing
from the purely qualitative communication approach, however, is an exit strategy.
At some point in the future, if all goes well, inflation will stabilize, and
interest rates will begin to rise. The task of communicating the timing of
that switch to markets with a minimum of confusion and uncertainty is crucial
and difficult. A quantitative measure of price stability provides one objective
basis that bond market participants could use to help forecast the change in
policy stance. For example, they would know that as disinflation risk recedes
and inflation forecasts begin to cluster in the middle to upper portions of
the price stability range, the Fed is quite likely to react. And, indeed, the
forecasts of bond market participants and the resulting rise in private yields
will help to contain inflation, doing some of the Fed's work for it.

"In closing, for me the lesson of the May 6 statement was to underscore the
vital importance of central bank communication. In a world in which inflation
risks are no longer one-sided and short-term nominal interest rates are at
historical lows, the success of monetary policy depends more on how well the
central bank communicates its plans and objectives than on any other single
factor."

Such words are refreshing, but are not enough. They must be backed up with
actions. It is simply inappropriate that a small group of men operate in such
secrecy on matters of vital public interest. Given that their recent actions
are clearly promoting instability and putting the entire world economy at risk,
it is more than inappropriate.

Home Again, Off Again

It is late and the letter is long enough. I will have to comment on Bill Bonner's
book Financial Reckoning Day (Wiley) in a later letter. I have almost
finished reading an advance (electronic) copy, and I can tell you I think you
should read it as soon as it comes out. Do I agree with every word? No, but
like McCulley, Bonner makes me think, and he will make you think, too. If you
only read people who think like you, you will soon find you do not do much
thinking. It is in the arena of ideas that the blade of the mind gets sharpened.
It also helps that he is a writer's writer, one of the best crafter of words
I know, and simply a pleasure to read, even if his words are sobering. You
can get a copy shipped as soon as it is ready by going to Amazon.com (http://www.amazon.com/exec/obidos/ASIN/0471449733/frontlinethou-20).

I leave on Monday for Nova Scotia. I have promised my bride a week of actual
vacation. Just to insure my resolve and from looking at the itinerary, I think
she has found a few places where the internet does not conveniently reach.
Withdrawal will be hard, but she promises I will survive. At the end of the
week, we come back to Halifax and civilization, and there I find if I can work
away from the Texas heat and my office for the next two weeks. Clients should
note that these latter few weeks will be a working "vacation," and I will be
available. I will also contact those who have asked for a meeting in San Francisco
from August 14-17.

Note: John Mauldin is president of Millennium Wave Advisors, LLC, (MWA)
a registered investment advisor. All material presented herein is believed
to be reliable but we cannot attest to its accuracy. Investment recommendations
may change and readers are urged to check with their investment counselors
before making any investment decisions. Opinions expressed in these reports
may change without prior notice. John Mauldin and/or the staff at Millennium
Wave Advisors, LLC may or may not have investments in any funds cited above.
Mauldin can be reached at 800-829-7273. MWA is also a Commodity Pool Operator
(CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well
as an Introducing Broker (IB). John Mauldin is a registered representative
of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer.
Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Funds recommended
by Mauldin may pay a portion of their fees to Altegris Investments who will
share 1/3 of those fees with MWS and thus to Mauldin. For more information
please see "How does it work" at www.accreditedinvestor.ws.
This website and any views expressed herein are provided for information purposes
only and should not be construed in any way as an offer, an endorsement or
inducement to invest with any CTA, fund or program mentioned. Before seeking
any advisors services or making an investment in a fund, investors must read
and examine thoroughly the respective disclosure document or offering memorandum.
Please read the information under the tab "Hedge Funds: Risks" for further
risks associated with hedge funds.

If you would like to reproduce any of John Mauldin's E-Letters you must include
the source of your quote and an email address (John@FrontlineThoughts.com)
Please write to info@FrontlineThoughts.com
and inform us of any reproductions. Please include where and when the copy
will be reproduced.

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment
advisor. All material presented herein is believed to be reliable but we cannot
attest to its accuracy. Investment recommendations may change and readers are
urged to check with their investment counselors before making any investment
decisions.

Opinions expressed in these reports may change without prior notice. John
Mauldin and/or the staffs at Millennium Wave Advisors, LLC may or may not have
investments in any funds cited above.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS
WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING
ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS
RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND
OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT
LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION
INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN
DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY
REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE
UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT
MANAGER.